The Good Way to Say Good Bye

Entrepreneurs and investors spend a lot of time thinking about putting together the right team. But just as getting people on your team is important, getting people off your team is important, too. How you say goodbye, however, must be handled properly because doing it wrong can cost you your business.

There are four circumstances under which a person can leave your company based on two variables. The variables are “how” and “why”. The how can be that they decided to leave or you fired them; the why can be for good reason or for no good reason. They can be summed up in a nice two-by-two diagram (see above).

Startup team members can be closely linked to the company financially through their investments, legally through their contracts and intellectual property, or emotionally through their relationships within the team and outside of it. These links must be handled properly at time of departure in order to minimize possible fallout. Each quadrant in the diagram above provides context for the fair treatment of a departing member.

Quadrant A: Fired for Good Reason

All members of the startup team are expected to pitch in, do their part, and play nice with the others. Failure to perform the tasks and projects assigned can provide a good reason for termination, especially if a team member has received repeated warnings. In fact, unless there are repeated warnings and opportunity for correction, you likely do not have a good reason to fire someone (see “No Reason” below).

When a team member is fired for good reason, the company should minimize the impact on the company by shifting most of the suffering onto the individual that is being fired. If they had equity compensation, then steps should be taken to retrieve the equity so that the company won’t be left with a possibly disgruntled absentee owner (investors hate this). Cash investments should be paid back (without interest) to sever all financial ties with the individual.

Leaving a company under these circumstances is most uncomfortable. This is good because the consequences of not doing your job should provide at least some deterrent for employees.

Quadrant B: Fired for No Good Reason

Sometimes, there are people on the team that are no longer needed, or the company can no longer support them. Perhaps the company changes strategy and no longer has a need for their skills; or, perhaps they can outsource the person’s role for less money. If the person was working hard, doing what was asked, and being a team player, then the company has “no good reason” to fire that person. I once had to terminate an entire department of hard-working telemarketing people because we decided to no longer do telemarketing.

We live in an “at will” world, so a company can fire someone regardless of the reason. But, contrast the circumstances of Quadrant B with those in Quadrant A. In the case of no reason, the company needs to bear a larger amount of the suffering. Bearing the burden of the termination serves two purposes. First, it provides a penalty to the company for letting people go for no reason and two, it assures other employees that they won’t get hung out to dry if and when the company’s strategy changes.

In the case of firing for no reason, an employee should be allowed to keep the equity they have earned, or receive compensation in exchange for the equity. The compensation they receive should reflect what they had to forgo in order to earn the equity, not the value of the equity. So, if I worked for no salary in exchange for equity I should be compensated for my time at a rate in line with what I would have earned otherwise even if the stock has no value. This may create a strain on the company finances, but it is the right thing to do.

Quadrant C: Resign for Good Reason

There are a number of “good” reasons why a person can resign from a company. For instance, let’s say the company decides to move to a new state and expects you to uproot your life and move, too. Or, perhaps you were the marketing guy and your manager tells you that you are now in charge of cleaning the toilets. Another example: your manager wants to cut your salary or other compensation when other employees don’t have too. These are things outside of employees’ control that aren’t really their fault (unless they are, then see Quadrant A).

In these cases, the employee should be able to leave with similar treatment as if they had been fired for no good reason. The company consciously made decisions that made a person’s life uncomfortable (even if it was unavoidable). Therefore, the company should suffer the consequences of their choices. If a company acts selfishly under these circumstances, they will damage the relationships with existing employees.

Quadrant D: Resign for No Good Reason

Sometimes, a startup employee decides to leave with for no reason other than he or she feels like it. Maybe they became interested in something else, or they don’t believe in the company anymore. Maybe they’re just bored. In other words, the company did nothing explicitly wrong, but the employee left anyway. This is probably the most common circumstance under which someone leaves.

In these cases, the employee is basically leaving the company in the lurch and should be prepared to bear the consequences. Like in Quadrant A (fire for good reason), the company should seek to minimize the damage of the person’s departure. It can be painful for someone to leave under these circumstances, which is good. It deters them from leaving the company on a whim which increases employee retention.

In all cases, fairness is critical. How you treat people under different circumstances is a testament to the kind of company you are and what you want to be. Being fair may be inconvenient, but in the long run you will become a better company. Investors, employees, partners and even customers will have more respect for you if do the right thing.

Hi Mike,
I’m reading in the ‘Gator’ book that employees get no equity for their unpaid time if they’re fired for reason or leave w/o reason. If they leave because they’ve run out of eating/rent money is that a good enough reason?

I’m thinking of situation (1) where, when she comes in, Mary says, “I can afford to work 12 months FT wo pay, but after that, I need living money –I’ll have to leave or cut my hours for a paying job.” What about situation (2): same thing, with only a month or two notice? Or situation (3): 6 months and she finds a replacement? Or situation (4): she gives a couple of months warning before cutting back: “I’ll need to cut back to half time in a month or two, because I need a paying job for living expenses.”?

It seems to me how long grunts can afford to hang in there wo pay is something to discuss up front, and if they reach their limit, they’re leaving w reason. The more warning and accommodation they make, the more it should be ‘with reason.’ So someone who finds a replacement, or stays part time should keep their time equity, and someone who leaves the company in the lurch should get zip.

Just thinking about it, I’d say, for an important but not critical talent, 6 mo notice- 100% equity, 4 mo, 2/3, 2 months, 1/2 or 1/3, less than 2 months, none. It would also depend how hard they are to replace. Somebody w unique skills/knowledge should be held to a higher standard than someone w entry-level talent. Is this something you cover in the book?

Mike, I love your concept and I admit I haven’t read your book yet but I think this complicates your model. It’s subjective (so who gets to decide which quadrant in the situation, a court?), and the whole point of what I’m reading is that you recognise equity based on performance. So to take it away from someone later, defeats the purpose of performance recognition.

It’s like saying you pay someone a salary for a year and then you ask them to pay you back because the left on bad terms. But they can “keep” their salary, if they had a good reason. If this was a cash salary, this wouldn’t be the case.

Hi Elias, the quadrants use fairly standard terms from employment contracts so it should not be very ambiguous. Slicing Pie is not a performance-based model. Performance is way too subjective. Slicing Pie is a risk-based model. Risk is the fair market value of the inputs.

I understand you point, but people go in knowing they are taking risk. A risk is like a bet. If you fold (quit or get fired for good reason) you lose your bet.

I’m influenced by California’s at-will employments I guess where it doesn’t actually matter. So my issue is having people earn equity and then clearing them is something that could be manipulated, much like how a CEO could fire someone before their one year cliff.

It should be you get paid out when you “gave” in fair market value or you can convert that to equity, but that’s it. Whenever you allow discretion to (dis)allow someone to convert their contribution then that’s a weakness in the model.

Slicing Pie is a moral agreement. It’s about being fair and doing right by the people who help you succeed. It won’t protect you from jerks. If the laws in your state have requirements that conflict with fairness you will have to adhere to them… in some countries the laws are changing and Slicing Pie is part of the conversation.

I guess that’s why I’m puzzled if it’s about fairness. Disregarding the contributions of someone is the equivalent of unpaid wages being cleared off the books. Your philosophy is a great one and needs to be holistic, but this but doesn’t make sense and opens it up to unnecessary litigation.

That said, if you strictly define what “jerk” means — like fraud, theft and working on a competing business — then that would work. But allowing discretion of what constitutes a (un)fair termination is a weakness with this that if you don’t define would have to get defined by the courts eventually.

If you fire someone in a state that requires you to pay people you will have to pay them or risk legal action.

Kh Tarik

what about someone that has equity in business. if you fire them and lets say they have x% at day one, but due to their slow work and lack of performance you fire them.
is that mean they get x% of the business if you increase shares? or they basically get the x% from initial shares?

example you start with 1000 shares, and that person get 10% in this case will be 100 shares. but down the line after they got fired you increased the share to 10000. do they have 1000 share or just 100?

Slicing Pie has this built-in. If someone leaves for no good reason he would lose slices for non-cash contributions and lose the multiplier for cash contributions. This imposes consequences on people who up and quit for no reason.

It’s like folding your cards in poker. You fold, you lose your bets. You keep playing, it stays on the table.

CT

I am a founder who came up with a concept and recruits a co-founder to join him in starting an LLC. They are 50/50 equity owners and 50/50 funders of the startup. After spending 15% of the starting capital the initial founder realizes he can not match his co founders commitment of Time to the venture, and wants to move into an investors position. Plus there is a need for new subject matter expertise that neither the 2 founders have, so there is a strong need to find a new founder with the requisite subject matter expertise. So the founder offers to the cofounder the option – we wind down the LLC and divide what is left in the capital account, or if the co founder chooses – the founder agrees to give up 40% of his equity (retaining 10% ownership) and gets his capital paid back over time so as not to cripple the startup. The founder wants to be fair with the co founder and give him the best chances of success. We do not want to recreate the wheel, can you share some examples of how others have addressed this situation. The founder is in a good position to provide advice and funding in the future as the venture becomes more stable and moves from high risk to scaling.

What you are describing will not work, but the Slicing Pie model will help you unwind this.This is exactly why Slicing Pie exists. It’s not complicated, but you’ll need to dig in a little deeper. Here are some options: